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Financing development: debt versus equity

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  • Joël van der Weele
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    Abstract

    In this paper we investigate the impact of the balance between debt and equity finance on the financial stability of developing countries. Employing extreme bounds analysis to deal with model uncertainty, we estimate a model of an exchange rate pressure index depending on various financial capital stocks and flows. We find evidence for a stabilizing effect of FDI and a destabilizing effect of short-term debt and publicly guaranteed flows to commercial banks. We also investigate the path dependency of different types of capital flows controlling for different push and pull factors. In general, we find that existing stocks of short-term debt make it harder for a country to obtain new finance. Furthermore, the level of capital market development has an important impact on the composition of capital flows to a country.

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    File URL: http://www.dnb.nl/binaries/Working%20Paper%2038_tcm46-146695.pdf
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    Bibliographic Info

    Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 038.

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    Date of creation: May 2005
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    Handle: RePEc:dnb:dnbwpp:038

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    Keywords: emerging markets; capital flows; currency crises; robust estimation;

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